Sector overview
Definition
Here is the GICS® definition by MSCI and Standard & Poor’s:
The Telecommunication Services Sector contains companies that provide communications services primarily through a fixed-line, cellular or wireless, high bandwidth and/or fiber optic cable network.
Companies
This sector contains six companies in the S&P 500 and 25 in the Russell 2000. It is the smallest sector in company number. Here is the list of the S&P 500 companies:
Table 12.1: Stock examples: S&P 500 Telecommunication
This set of stocks is too small for elaborate statistical strategies. For this sector, I therefore propose a unique strategy with 10 holdings in the Russell 3000 index. At the time I write this, there are 39 telecommunication services companies in the Russell 3000.
Russell 3000 strategy
Individually relevant factors
Here are the factors from my working list that are individually relevant for the Russell 3000 Telecom reference set:
Table 12.2: Individually relevant factors: Russell 3000 Telecommunication
Strategy description
This strategy uses a single valuation ratio.
Table 12.3: Strategy description: Russell 3000 Telecommunication
Rationalised interpretation: this strategy selects the cheapest companies relative to earnings estimate. The telecom sector was globally the hardest hit in the dot-com crash: taking all Russell 3000 Telecom stocks in equal weight, it is the only sector that is still in drawdown since the 2000 bubble.
Basic simulation
Fig 12.1: Simulation data and equity curve: Russell 3000 Telecommunication
Hedged simulation
Fig 12.2: Simulation data and equity curve: Russell 3000 Telecommunication, Hedged
Consistency
Annualised returns with hedging by five-year periods:
Table 12.4: Consistency over five-year periods
Comment
Telecommunication Services are not only the smallest sector, but also the least profitable for at least 15 years. Compared with the whole Telecom sector, this strategy avoided the worst of the bursting of the dot-com bubble. That might also help in a possible bubble 2.0. In addition, the two last five-year periods have an annualised return above 20% (hedged), which is quite encouraging.